What is technical analysis?

Technical analysis is the study of past market action to try to gauge what the market might do in
the future. At its most basic, it is the study of price. Fundamental analysis involves analyzing the
characteristics of a company in order to estimate its value. Technical analysis takes an entirely
different approach; it doesn't care about the "value" of a company. Technical analysis is only
interested in the price movements in the market.
Technical analysis philosophy: 3 basic tenets
Market action discounts everything
 All known information related to the security is reflected in the price of the stock; this
includes fundamental factors
 As soon as new information comes to light it's immediately reflected in the stock's price
Prices move in trends
 In technical analysis, prices of securities tend to move in observable trends with a
tendency to stay in the trend
 The trend is considered to be intact until the trend line is broken
 After a trend has been established, the future price movement is more likely to go in the
same direction as the trend rather than against it 
 The old adage "the trend is your friend" means you should trade in the same direction as
the trend
History repeats itself
 Technical analysis is the study of what has happened to the price of a security in the past
with the expectation that history tends to repeat itself
 Many of the chart patterns in technical analysis have been used for more than 100 years,
and they are still believed to be relevant because they illustrate patterns in price movements
that often repeat themselves
 The repetitive nature of price movements is attributed to market psychology

DOW THEORY

Dow Theory: A brief history

Dow Theory was first introduced by Charles Dow, who was the founder of Dow Jones and Company and
the first editor of the Wall Street Journal. This theory is based on the many editorials he had written
between the years of 1900-1902. Following his death, William Hamilton continued the work.

In 1932, the writings of these two men were collectively published as the Dow Theory by Robert Rhea.

What is Dow Theory?

The theory explains how the stock market can be used by investors to understand the health of the
business environment. It was the first theory to explain that the market moves in trends. And while a lot
has changed in the stock markets over the years, the basic tenets of Dow Theory still hold water.

The market discounts all news

This principle explains that any information available in the market is already reflected in the price of
stocks and indices. This includes all data such as earnings announcements by companies, rise (or fall) in
inflation or even sentiments of investors.

As a result, it is better to analyse price movements instead of studying earnings reports or balance
sheets of companies.

The market has three trends

This theory was the first to propound that the market moves in trends. The trends are:

 Primary trend is the major trend for the market. It indicates how the market moves in the long-term. A
primary trend could span many years.

 Secondary trends are considered to be corrections to a primary trend. This is like an opposite

movement to the primary trend. For example, if the primary trend is upward (bullish), the secondary
trend(s) is downward. These trends could last anywhere between a few weeks to a few months.

 Minor trends are fluctuations to the market movement on a daily basis. These trends last for less than
three weeks and go against the movement of the secondary trend. Some analysts consider minor trends
to mirror market chatter.

Support and resistance

BY FIDELITY'S TRADING STRATEGY DESK

Beginner Technical Analysis

Support and resistance levels are important points in time where the forces of supply and demand
meet. These support and resistance levels are seen by technical analysts as crucial when determining
market psychology and supply and demand. When these support or resistance levels are broken, the
supply and demand forces that created these levels are assumed to have moved, in which case new
levels of support and resistance will likely be established.
Support

Support is the level at which demand is strong enough to stop the stock from falling any further. In the
image above you can see that each time the price reaches the support level, it has difficulty penetrating
that level. The rationale is that as the price drops and approaches support, buyers (demand) become
more inclined to buy and sellers (supply) become less willing to sell.

Resistance

Resistance is the level at which supply is strong enough to stop the stock from moving higher. In the
image above you can see that each time the price reaches the resistance level, it has a hard time moving
higher. The rationale is that as the price rises and approaches resistance, sellers (supply) become more
inclined to sell and buyers (demand) become less willing to buy.

Psychology of support and resistance

Let’s use a few examples of market participants to explain the psychology behind support and
resistance.

First let’s assume there are buyers who’ve been buying a stock close to a support area. Let’s say that
support level is $50. They buy some stock at $50 and now it moves up and away from that level to $55.
The buyers are happy and want to buy more stock at $50, but not $55. They decide if the price moves
back down to $50, they will buy more. They’re creating demand at the $50 level.
Let’s take another group of investors. These are the people that were uncommitted. They were thinking
about buying the stock at $50 but never “pulled the trigger.” Now the stock is at $55 and they regret not
buying it. They decide that if it gets to $50 again, they will not make the same mistake and they will buy
the stock this time. This creates potential demand.

The third group bought the stock below $50; let’s say they bought it at $40. When the stock got to $50,
they sold their stock, only to watch it go to $55. Now they want to re-establish their long positions and
want to buy it back at the same price they sold it, $50. They’ve changed their sentiment from sellers to
buyers. They regret selling it and want to right that wrong. This creates more demand.

Now let’s change things up to help understand resistance. Take all the above participants and say they
all own the stock at $50. Imagine yourself as one of the owners at $50. The stock goes to $55 and you
don’t sell. Now the stock goes back to $50, where you own it. What are you feeling? Regret for not
selling it at $55? Now it goes back to $55 and you sell as much as you can this time. So do the other
owners of the stock. The stock can’t get past $55 and retreats. There are at least 3 groups of stock
owners that are trying to sell their supply at $55. This creates a resistance level at $55.

CHARTS

POINT AND FIGURE CHARTS

Point & Figure charts consist of columns of X's and O's that
represent filtered price movements. X-Columns represent rising prices and
O-Columns represent falling prices. Each price box represents a specific value
that price must reach to warrant an X or an O. Time is not a factor in P&F
charting; these charts evolve as prices move. No movement in price means no
change in the P&F chart.
The 3-box Reversal Method is the most popular P&F charting method. In
classic 3-box reversal charts, column reversals are further filtered requiring a
3-box minimum to reverse the current column. Articles in the
StockCharts.com ChartSchool are based on this method.
P&F charts provide a unique look at price action that has several advantages.
P&F charts:
 Filter insignificant price movements and noise
 Focus on important price movements
 Remove the time aspect from the analysis process
 Make support/resistance levels much easier to identify
 Provide automatic and subjective trend lines
Creating a P&F Chart

On a P&F chart, price movements are represented with rising X-Columns and falling O-Columns. Each
column represents an uptrend or a downtrend of sorts. Each X or O occupies what is called a box on the
chart. Each chart has a setting called the Box Size, which defines the price range for each box.
Each chart has a second setting called the Reversal Amount, which determines the amount that a stock
needs to move in the opposite direction to warrant a column reversal. Whenever this reversal threshold
is crossed, a new column is started right next to the previous one, only moving in the opposite direction.

The “reversal distance” is the box size multiplied by the reversal amount. A box size of 1 and the reversal
amount of 3 would require a 3 point move to warrant a reversal (1 x 3). An X-Column extends as long as
price does not move down more than the “reversal distance.” Similarly, a stock in a downtrend will
cause a descending O-Column to appear. Only when the stock changes direction by more than the
reversal distance will a new X-column be added to the chart.

What Is A Head And Shoulders Pattern?

A head and shoulders pattern is a chart formation that resembles a baseline with three peaks, the
outside two are close in height and the middle is highest. In technical analysis, a head and shoulders
pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal. The head
and shoulders pattern is believed to be one of the most reliable trend reversal patterns.

Understanding A Head And Shoulders Pattern

The head and shoulders pattern forms when a stock's price rises to a peak and
subsequently declines back to the base of the prior up-move. Then, the price
rises above the former peak to form the "nose" and then again declines back to
the original base. Then, finally, the stock price rises again, but to the level of the
first, initial peak of the formation before declining back down to the base or
neckline of chart patterns one more time.

KEY TAKEAWAYS

 A head and shoulders pattern is a chart formation that resembles a

baseline with three peaks, the outside two are close in height and the
middle is highest.
 A head and shoulders pattern describes a specific chart formation that
predicts a bullish-to-bearish trend reversal.
 The head and shoulders pattern is believed to be one of the most reliable
trend reversal patterns.
https://www.investopedia.com/terms/h/head-shoulders.asp

An inverse or reverse head and shoulders pattern is also a reliable indicator which can also signal that a
downward trend is about to reverse into an upward trend. In this case, the stock's price reaches three
consecutive lows, separated by temporary rallies. Of these, the second trough is the lowest (the head)
and the first and third are slightly shallower (the shoulders). The final rally after the third dip signals that
the bearish trend has reversed and prices are likely to keep rallying upward.

Inverse Head and Shoulders

The opposite of a head and shoulders chart is the inverse head and shoulders, also called a head and
shoulders bottom, is inverted with the head and shoulders top used to predict reversals in downtrends.
This pattern is identified when the price action of a security meets the following characteristics: the
price falls to a trough and then rises; the price falls below the former trough and then rises again; finally,
the price falls again but not as far as the second trough. Once the final trough is made, the price heads
upward, toward the resistance found near the top of the previous troughs.

Standard deviation

PER SHARE RATIOS

MARUTI SUZUKI

Basic EPS (Rs.) 248.30 255.62 243.32 177.58 122.85

Diluted EPS (Rs.) 248.30 255.62 243.32 177.58 122.85

Book Value [ExclRevalReserve]/Share (Rs.) 1,527.86 1,382.69 1,206.33 989.54

784.91
Return on Networth / Equity (%) 16.25 18.49 20.17 17.95 15.65

Dividend Payout Ratio (NP) (%) 32.21 29.34 14.38 14.07 20.34

Market Cap (Rs Cr.)153,369.07

P/E24.93

Dividend Yield.(%)1.58

HEROMOTOAP

Dividend Payout Ratio Net Profit 56.05 45.91 51.44 45.89 50.22

Basic EPS (Rs.) 169.48 185.14 169.12 156.86 119.46

Book Value [ExclRevalReserve]/Share (Rs.) 643.66 589.33 506.32 397.83 327.56

Market Cap (Rs Cr.)36,302.63

P/E9.69

Dividend Yield.(%)4.79

Return on Networth/Equity (%) 26.24 31.07 34.74 35.56 36.15

Diluted EPS (Rs.) 172.44 186.29 179.49 157.34 118.41

MAHINDRA AND MAHINDRA

Dividend Payout Ratio Net Profit 19.43 21.24 23.08 26.42 22.44

Market Cap (Rs Cr.)40,148.90

P/E8.57

Dividend Yield.(%)2.63

Basic EPS (Rs.) 40.29 36.64 30.69 53.05 56.23

Diluted EPS (Rs.) 40.13 36.47 30.54 52.80 53.66

Book Value [ExclRevalReserve]/Share (Rs.) 287.09 254.58 451.22 378.36 325.40

Return on Networth / Equity (%) 14.01 14.37 13.60 14.29 17.25

BAJAJ AUTO
Market Cap (Rs Cr.)65,155.33

P/E12.73

Dividend Yield.(%) 2.66

Basic EPS (Rs.) 161.60 140.60 132.30 135.80 97.20

Diluted EPS (Rs.) 161.60 140.60 132.30 135.80 97.20

Book Value [ExclRevalReserve]/Share (Rs.) 752.67 660.19 588.66 458.46 369.50

Return on Networth / Equity (%) 21.46 21.29 22.46 29.62 26.31

Dividend Payout Ratio (NP) (%) 37.13 39.12 3.77 73.63 51.42

BIBLIOGRAPHY

https://www.moneycontrol.com/financials/heromotocorp/consolidated-ratiosVI/HHM%23HHM

https://www.moneycontrol.com/india/stockpricequote/auto-carsjeeps/marutisuzukiindia/MS24

https://www.moneycontrol.com/india/stockpricequote/auto-carsjeeps/mahindramahindra/MM

https://www.moneycontrol.com/india/stockpricequote/auto-23-wheelers/bajajauto/BA10

https://www.fidelity.com/learning-center/trading-investing/technical-analysis/introduction-technical-
analysis/support-and-resistance

https://stockcharts.com/freecharts/pnf.php?c=MARUTI.IN,P